U.K. Inflation Slowdown Is Good News for All

U.K. consumer price inflation eased unexpectedly in May, rising 2.8% on the year–against an average economist forecast for 3.0%, which was also the same annual rate reported in April–as the cost of fuel, food, alcohol and tobacco all rose at a slower pace than a year ago.

But, at the same time the core measure of CPI, which strips out the volatile price movements of energy, food, alcohol and tobacco, accelerated to rise 2.2% on the year to May after a 2.1% annual gain in April.

The reason for that difference is that the drop in the cost of the volatile items accounted for the majority of the slowdown in the headline measure. So, once they were stripped out of the equation, increases in the cost of furniture, household equipment and maintenance–specifically carpets, furniture and household cleaning goods–along with a sharp rise in airfares due to the timing of Easter holidays, pushed the average price of goods as measured by the Office for National Statistics‘ core inflation index higher.

“Overall this is a soft release,” said David Tinsley, U,K, economist for BNP Paribas. “The rise in the core is perhaps a small fly in the ointment, but it seems to reflect timing issues.”

Now that we’ve cleared that up, what does this unexpected piece of good news mean for you, me and the economy?

It means that while average pay deals continue to hover around the 1% level implying real wages continue to fall, the difference is much smaller than when inflation was at its peak of 5.2% in the autumn of last year, so the stretch to buy must-needed items is shrinking.

That, in turn, suggests consumer spending should pick up some time before the end of the year and provide a much needed–if likely small–boost to the economy which is currently mired in recession with little prospect of emerging before the second half of the year at best.

Businesses should also benefit from a slowdown in the cost of raw materials used to produce goods purchased in stores.

“The large decline in the May inflation figures is good news,” said David Kern, chief economist at the British Chambers of Commerce. “If current trends continue, the squeeze felt by many businesses and consumers will begin to ease. Disposable incomes will improve, which will in turn give a significant boost to consumer spending.”

And, the slowdown in inflation closer to the Bank of England’s target rate of around 2% also gives them more room to expand the bond-buying program from the current £325 billion level, and pump more money into the private sector, which should also, at some point, provide upward momentum for the ailing economy.

“The inflation data are hardly the main issue for markets at this moment, but May’s data do serve to lower the hurdle to quantitative easing as soon as July, should the Monetary Policy Committee wish to oblige,” said Ross Walker, economist at RBS.

Overall then, some very welcome good news for the U.K. government and economy, but, the BCC warns that more still needs to be done to help growth, with policies on bank lending announced last week to be implemented “without delay”.

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